New Climate Risk Assessment Tool For Mortgage Lenders Released

During COP26, international climate change risk analysts XDI (The Cross Dependency Initiative) released a first-of-its-kind report focusing on climate risks for all 34 million UK residential and commercial addresses. It is expected that this assessment will be expanded to other geographies.

According to the data, a half million properties are at risk of losing affordable insurance as a 5-fold increase in damages caused by extreme weather is expected by the end of the century, raising the total number of vulnerable properties to 1.9 million.

Climate change driven extreme weather is expected to depress property values by as much as 7.5 Percent (£525 Billion GBP or $705 Billion USD) by the end of the century. In many cases, the value of the property will be less than the value owed to mortgage lenders.

A sharp rise in sea levels will cause coastal flooding and will result in 6 Percent of all properties being highly vulnerable. By 2060, this will likely surpass the surface water flooding risk and become the greatest source of inundation in the UK territory.

These predicted consequences of climate change may have an effect on the housing market, making some properties “unmortgageable” due to their loss of value. XDI has developed an interactive platform that provides powerful, on-demand, quantitative insights for decision makers, financial managers and investors. The platform  combines data sets with extensive climate models to provide deep analysis of an organisation’s exposure to climate change and extreme weather risk.

The XDI report presents a number key suggestions to tackle these risks. Among them is the need for mortgage lenders to understand the specific risk of each property, depending on its location but also its physical characteristics.

This assessment will also help borrowers to calculate the risk of “affordability” of their insurance cove. As extreme weather events become more frequent and intense, mortgage rates will rise in proportion.

Additionally, real estate investors will now need to have a deep understanding of their portfolio’s exposure to climate change impacts and how that may affect its value.

The report underscores that climate risk is financial risk. It says: “Lenders and other financial and investment organisations in the UK are under increasing pressure to report financial impacts of climate change to their investments, including mortgage portfolios on residential and commercial assets. Climate risk to these assets presents significant financial exposure for lenders and their investors.”